Planning, Math Skills Help Draw

REDEFINING RETIREMENT HUMBERTO & GEORGINA CRUZ

August 18, 2002|REDEFINING RETIREMENT HUMBERTO & GEORGINA CRUZ

For the past 24 hours, Georgina has read, re-read, studied, analyzed and annotated the 106-page booklet that came in the mail. She has put in checkmarks, highlighted her favorite passages in yellow and written out a list, in priority order.

The booklet describes in detail the shore excursions on a Western Europe cruise we are taking this month. We know what we'll be doing at every port -- seeing how diamonds are cut and polished in Antwerp, Belgium, for example, or if that tour is full, tasting handmade chocolates in Ghent.

Humberto has been busy with less exciting pursuits, tallying our freelance, dividend and interest income and our work-related expenses, including postage and long-distance calls. By keeping track regularly, it's a breeze figuring out how much we have to send to the government each quarter in estimated taxes.

Now we have evidence that these two traits -- enjoying planning and being comfortable with numbers -- may have a lot to do with a successful retirement.

A related trait -- keeping careful track of expenses, as we faithfully do -- also is strongly linked to financial planning and a secure retirement.

So suggests a new study on "Wealth Accumulation and the Propensity to Plan" by John Ameriks, Andrew Caplin and John Leahy, from the TIAA-CREF Institute, New York University and Boston University respectively.

"Our first hypothesis was that some people are just more inclined to plan than others," said Caplin, a professor of economics. "We chose to ask a question about vacations because planning in that situation is important without being connected with financial planning per se."

The question asked participants in a survey to say, on a scale of 1 to 6, how much they agreed with this statement:

"Before going on vacation, I spend a great deal of time examining where I would most like to go and what I would like to do."

Georgina, who starts planning our December family vacations in March, would need at least a 7. (Humberto would give it a 4).

Surprisingly, the study found no direct link between a desire to save for the future and the amount of time people spend planning their retirement finances.

But there was a strong correlation between being confident in one's math skills (Humberto is an easy 6 here, Georgina the 4) and the propensity to plan.

"Certainly you need a comfort with math to do financial planning and compute a few things," said Ameriks, a senior research fellow with the TIAA-CREF Institute.

Although this study raises as many questions as it answers, we find it intriguing for a couple of reasons.

First, many other studies have found that people with a high propensity to plan are much more likely to save and have a more secure and enjoyable retirement.

Also, keeping track of expenses appears to have a strong link to one's propensity to plan, to actual planning and to saving.

Therefore, we believe that if we can identify the factors that can help people plan and save, we can make it easier for everyone to enjoy a successful retirement.

"I think your hypothesis is a good one," said Caplin, who plans to conduct further research on the subject with Ameriks and Leahy. "It opens the question of whether ultimately you could teach people things that could actually help them to save if they want to."

For example, Caplin said, should policy makers interested in encouraging retirement savings promote educational programs to teach planning skills, even if not directly related to finances? Should they push for programs to build confidence in math skills? (We think they should do both.)

We also find redemption in the strong correlation found between monitoring spending and financial success.

People who don't know why we do it sometimes find it funny that we still keep track of every penny, such as $4 for a minor-league baseball game, and mistakenly think it's a sign of penny-pinching.

But in fact, "it's all about aligning your actual spending with your priorities," said Marvin Pokrant, a reader in Laguna Niguel, Calif., who does it like we do and, like Humberto, was able to retire at age 55.

And as Pokrant said, "You may discover you spend relatively little on something that gives you pleasure, and therefore you are willing to spend more in that area." That's what we do with family vacations.

Ameriks, the research fellow, backs us up. "You can spend as much as you like -- that's a different decision," he said. "Budgeting is not about restricting. It is about allocating, and writing it down."

See other columns by Humberto Cruz in Monday's Your Business section and Wednesday's Business section. Humberto Cruz can be reached at AskHumberto@aol.com and Georgina Cruz at GVCruz@aol.com, or c/o Tribune Media Services, 435 N. Michigan Ave., Suite 1500, Chicago, IL 60611.